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Howard Stutz

Alliance Risking Default on Loans

12 September 2005

Las Vegas-based slot machine manufacturer Alliance Gaming is in danger of defaulting on its loan agreements if the company continues to delay filing its fiscal year financial report, management disclosed Friday.

Since early August, Alliance has thrice delayed announcing year-end and fourth-quarter earnings, saying it has not been able to complete an audit review of the company's finances.

During an early morning conference call with gaming analysts, Alliance executives acknowledged it may be November before the company files its form 10-K with the Securities and Exchange Commission, which spells out a publicly traded business's 12-month financial picture.

If that happens, Alliance would be in default of the language covering its loan agreements.

"The delay has been principally with respect to the timing of revenue recognition," said Alliance Gaming Chief Financial Officer Steven Des Champs. "We have not found any evidence of fictitious sales or employee malfeasance."

Des Champs said the company will file for an extension in filing its 10-K through the end of September, but he said it's highly unlikely Alliance will make that date. Another extension that would take the reporting process into November would "breach the leverage covenants."

While Alliance would seek a waiver from its lenders, one gaming analyst thought the credit facility interest rates would jump two percentage points.

Alliance's balance sheet has about $18 million in available cash and about $330 million in debt.

Deutsche Bank gaming analyst Marc Falcone said if lenders don't grant a waiver, one option Alliance might have is to sell its Rainbow Casino in Vicksburg, Miss., which could be valued between $130 million and $150 million, to reduce debt.

The delays have soured gaming analysts on the company.

"At this point, we believe there is very little visibility into Alliance Gaming's operations and there is increasing uncertainty as to what the next step for the company will be," Goldman Sachs gaming analyst Steve Kent said in a note to investors. "Alliance also faces an uphill battle in competing for slot floor space."

Shares in Alliance fell Friday on the New York Stock Exchange, closing at $10.63, down 27 cents, or 2.48 percent. Almost 1.6 million shares were traded, three times the company's average daily volume.

In addition, Standard & Poor's Ratings Services placed its ratings on Alliance Gaming on creditwatch with negative implications.

"We expect to comment further on the situation by the end of September," S&P credit analyst Peggy Hwan said.

Gaming analysts said Alliance needs to impress casino operators during next week's Global Gaming Expo with its new game titles and server-based gaming previews.

On a positive note, Alliance announced its Bally Gaming and Systems subsidiary signed an agreement with Boyd Gaming Corp. to install complete slot and casino management systems at two of the company's Las Vegas casinos, covering almost 5,000 slot machines.

One of the casinos covered in the agreement is the South Coast, which is expected to open in early 2006 and have 2,450 slot machines. The second casino was not named.

"Having the systems at these two Las Vegas properties will give us a showcase display of our new technology," said Alliance Gaming Chief Executive Officer Richard Hadrill.

In addition, Bally Gaming will provide a system for accounting, tracking and ticketing for 302 slot machines at the casino in the Remington Park race track in Oklahoma City.